Saturday, November 17, 2007

Fund managers’ appetite for risk has also weakened considerably.

THE flood of foreign funds surging into Asian bourses over the past four weeks has been reversed by the ongoing credit woes in the United States.

Singapore has started experiencing an outflow, with a net sale of US$2.1 million (S$3 million) last week by funds investing exclusively in Asian equities, according to Citigroup Investment Research.

This is a striking contrast to the situation in end-September, when US$110.4 million flowed into local equities in the space of a week.

And in other bullish regional markets such as Hong Kong, China and India, the inflow of foreign funds into equities has slowed down considerably.

Only US$84.3 million was invested in H-shares - shares of China firms listed in Hong Kong - between Nov 1 and Nov 7, compared with US$576.5 million between Sept 27 and Oct 3.

Over the same period, foreign funds spent just US$29.9 million on Hong Kong stocks, excluding H-shares, an 86 per cent plunge from the US$216.5 million they spent in the week of Sept 27 to Oct 3.

The slowdown in fresh investments in Asian equities coincided with the bearish mood in the US, where banks have been writing down billions of dollars in their pool of debts.

That has been coupled with the greenback plunging against regional currencies following two US interest rate cuts.

It raises fears of an unravelling in the carry trade - hedge funds taking out huge yen loans because of Japan’s low interest rates to invest in higher-yielding assets.

Sentiment has also been spooked by perception that H-shares have shot up too fast, fuelled by foreign investors entering Hong Kong and Singapore in anticipation of China allowing domestic funds to invest in overseas equities.

And despite oil soaring close to US$100 a barrel, fund managers have started to pare down positions in the energy sector.

Despite the falls in regional markets, the Merrill Lynch report noted that fund managers are still ‘overweight’ on shares, having reduced cash holdings to 2.8 per cent from 3.7 per cent last month.

And even as Hong Kong’s Hang Seng Index has dropped by more than 10 per cent from its record high in September, Merrill Lynch said fund managers continue to favour Hong Kong and ’sharply increase their enthusiasm for frontier markets’.

‘Fund managers have also returned to Singapore and reduced their exposure in other Asean markets,’ it added.

But Morgan Stanley’s head of global emerging markets equity strategy, Mr Jonathan Garner, said that next year may be more difficult than this year.

While the focus is on the impact any slowdown in the US economy could have on emerging markets, Europe is a much bigger export market for developing countries. ‘Weakness in the US economy could spill over to the euro zone. Emerging markets may survive a slowdown in the US, but not the US and Europe combined,’ said Mr Garner.

He expressed particular concern over a possible ‘contraction in valuations’ in China and India, after their exceptional stock market performances this year. ‘H-shares valuations are back at the 1997 and 2000 peak levels.’

Morgan Stanley has adopted a defensive posture, adding Telekom Malaysia and removing China Mobile and Hyundai Heavy from its focus list last week.